quarta-feira, abril 25, 2012

Europe's Phony Growth Debate

Editorial do WSJ

Growth or austerity? That's the choice facing Europe these days—or so the Keynesian consensus keeps saying. According to this view, which has dominated world economic councils since the 2008 crisis began, "growth" is mainly a function of government spending.

Spend more and you're for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you're for austerity and thus opposed to growth.

This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe's current mess. The real debate ought to be over which policies best produce growth.

In the 1980s, the world learned (or so we thought) that the way out of the malaise of the 1970s were reforms that encourage private investment and risk-taking, labor mobility and flexibility, an end to price controls, tax rates that encouraged capital formation, and what the World Bank now broadly calls "the ease of doing business." Amid this crisis, Europe has tried everything except these policies.

If Reagan or Margaret Thatcher are too déclassé for Europeans to invoke, how about Germany? Throughout the 1990s and the first years of the last decade, Germany was Europe's hobbled giant, with consistently subpar growth rates and unemployment that in 2005 hit 11.3%, nearly at the top of the OECD chart.

Then-Chancellor Gerhard Schröder, a Social Democrat, surprised the world, to say nothing of his own voters, by pushing through the labor-market reforms that paved the way for the current relative prosperity. The changes cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on working time and pay.

The Schröder government, and later the coalition under Angela Merkel, also cut federal corporate income taxes to 15% from 45% in 1998. Include state taxes, and the effective corporate rate today is close to 30%, down from 50% or more in the 1990s. These reforms made Germany more competitive, attracted investment and jobs, and paved the way for the country's economic resurgence and an unemployment rate currently at 5.7%.

Mrs. Merkel's government did the world an additional favor in 2009, amid the financial crisis, by rejecting calls from the International Monetary Fund, then British Prime Minister Gordon Brown, President Obama, Treasury Secretary Tim Geithner and the same dominant Keynesian consensus to join the global spending party.

"They've already pumped endless amounts of money into the economy," said German Finance Minister Wolfgang Schäuble in 2010 about U.S. policy. "The results are dismal." (See our March 12, 2009 editorial, "Old Europe Is Right on Stimulus.")

Germany's resurgence might have been even stronger if Mrs. Merkel and her coalition partners hadn't reneged on their tax-cutting campaign promises and raised VAT and other taxes in a bid to stay close to budget balance. Still, Europe is lucky that its largest economy remains strong and creditworthy.

Yet now Mrs. Merkel is widely berated for avoiding the policy errors that led to the debt crisis and for having the nerve to encourage other countries to emulate the reforms that worked in Germany. The Keynesians will never forgive the Germans for being right.

Another European spending spree is unsustainable in any case. As the nearby chart shows, debt levels have climbed dramatically across the developed world since the crisis began in 2008, and that debt and the current dreary recovery (or double-dip recessions) are all there is to show for the great Keynesian spending blowout.

Now bond yields are ticking back up in the euro zone's periphery economies, European stock indexes are stumbling, and much of the Continent is in recession. Adam Smith's bond vigilantes are telling European governments that without reforms that reduce spending and encourage more growth in the private economy, their countries are increasingly risky bets. As the smarter Germans understand, the bond markets may be the only lobby for genuine pro-growth reform that exists in most of Europe.

Other than an inflation that will create new problems and bring its own crisis, economic growth is the only way out of Europe's debt morass. But it has to be private growth driven by reforms in taxes, labor markets, regulation, pensions and more.

Europe's voters have already swept several governments from office, and they seem ready to sweep out more. But what really needs to be swept away is the dominant and debilitating consensus that government spending can conjure prosperity.